Keeping Precious Metals Offshore

An increasing number of Americans are concerned enough about the threat of precious metals confiscation to want to store gold or silver overseas. But laws in effect in 21 states may stand in their way.

I learned about these laws last year when one of my subscribers in Arizona called.

He wanted to buy gold from a foreign dealer for storage offshore, but the dealer refused to sell to him. The reason: the Arizona Model Commodities Act. After some research, I learned that 21 states have enacted the MCA or some variation of it: Arizona, California, Colorado, Georgia, Idaho, Indiana, Iowa, Maine, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Oregon, Utah, and Washington.

I looked into the Nevada law, which a lawyer in that state told me was typical of MCAs in other states. Basically, residents of Nevada can purchase “commodities” only under circumstances which effectively exclude having precious metals delivered a non-U.S. storage facility.

The MCA came into existence in the 1980s, after a series of commodities scams in the 1970s.

One of the most notorious ones was International Gold Bullion Exchange (IGBE). Beginning in 1979, William and James Alderdice built their tiny jewelry business in Fort Lauderdale into a multi-million-dollar enterprise with over 1,000 employees.

IGBE advertised in The Wall Street Journal, Barron’s, and many other respected financial publications. In exchange for discount prices, customers waited three months or more for delivery. But many customers never received anything. When authorities finally caught up with IGBE, much of the gold supposedly stored for customers turned out to be railroad ties painted gold. In the end, customers lost millions of dollars.

With this background, it’s not surprising that states acted to protect their residents from commodities scams. But the laws appear to prohibit commodities purchases for delivery overseas.

Fortunately, companies that sell precious metals for storage overseas have developed some creative ways to deal with these laws. One option is for the buyer to use the address of a friend or family member in a non-MCA state. Another is to purchase the metals through an IRA with a custodian in a non-MCA state. A third is to sell the metals to an offshore structure that the buyer controls or is a beneficiary of.

Ultimately, though, the lesson of IGBE and similar scams is “buyer beware.” Wherever you buy, if you don’t take physical possession of precious metals you purchase, make sure that the company you’re dealing with is storing real gold, silver, platinum, or palladium—not railroad ties painted to look like the real thing.

Now, Here’s How to Report Them…

Unfortunately, neither the IRS nor the U.S. Treasury has provided direct guidance on how to report metals held offshore. As a result, I generally recommend that my clients report such ownership, although there appear to be some exceptions.

First, a little background…

U.S. citizens and residents have an annual obligation to report the existence of all “foreign bank, securities or ‘other’ financial accounts” if the aggregate value of those accounts exceeded US$10,000 at any time during the preceding year. Those failing to do so face a fine up to US$250,000, imprisonment up to five years, or both. (In an earlier blog entry, I described how non-U.S. persons have the same obligation if they are “in or doing business” in the United States.)

The report, which the Treasury Department cleverly calls Form TD F 90-22.1, is due by June 30 of the following year. Thus, you must file this form by June 30, 2009, if you had any reportable foreign account relationships anytime in 2008.

You have a separate obligation to disclose any “reportable” foreign accounts on Schedule B of Form 1040. Hopefully, you already made that acknowledgment when you filed your 2008 tax return. If not, you should file an amended return and make the required disclosure (check “yes” on line 7a of Schedule B).

The Treasury Department and the IRS construe the term “financial account” very broadly. The definition unquestionably includes bank, securities, and other accounts that hold financial instruments. However, it does not include individual bonds or stock certificates. This is an important distinction. If you have a foreign brokerage account that contains stock, this is a foreign financial account. If you hold individual shares of the stock directly, it is not reportable.

By analogy, the same rules would presumably apply to gold or other precious metals held offshore. If you hold the metals in a safety deposit box or private vault, without opening a bank or other financial account, you don’t appear to have any reporting obligation. (However, at many foreign banks, you must open an account in order to rent a safety deposit box.) On the other hand, if you purchase the metals through a foreign bank account and the bank stores the metals in its vault as part of your account holdings, the relationship would be reportable.

What if you arrange for a company to purchase gold or other metals on your behalf and that company stores those metals on your behalf in a foreign bank’s vault? While nothing is certain in life (other than death and taxes) a strong case can be made that this is not a “foreign financial account” if the following conditions apply:

The company does not itself sell the metals but only brokers purchases and sales

The metals are held together in a designated area of the foreign bank’s vault

Each bar or coin is identified by a unique, certified number.

The bars or coins in the vault are individually packaged and labeled so that it they are readily identifiable as your property.

You can take physical possession of the metals at any time.

Naturally, the IRS might disagree with this analysis. And if you enter into such an arrangement, I highly recommend confirming my interpretation with your own tax advisor.

Regards,
Mark Nestmann

January 15, 2010

Since 1990, Mark Nestmann has helped hundreds of clients seeking wealth preservation and international tax planning solutions. He is the author of many books and reports dealing with these subjects and a popular public speaker.

Beginning his career as an investigative journalist in 1983, Nestmann now serves as President of The Nestmann Group, Ltd., an international consultancy assisting individuals to achieve their wealth preservation goals. He also is the Tax and Asset Protection editor for The Sovereign Society. Nestmann divides his time between offices in Vienna, Austria and Phoenix, Arizona.

About Mark Nestmann:

Mark Nestmann is a leading writer and speaker on offshore topics and financial and personal privacy issues. Ron Paul describes him as “Mr. Privacy.” Since 1990 he has helped hundreds of clients seeking wealth preservation and international tax planning solutions. Beginning his career as an investigative journalist in 1983, Nestmann now serves as President of The Nestmann Group, Ltd., an international consultancy assisting individuals to achieve their wealth preservation goals. In addition, he is the Tax and Asset Protection editor for The Sovereign Society. He is also the author of many books, including the well-regarded How to Achieve Financial Privacy in a Public Age, Privacy 2000, and Asset Protection 2000. You can view his website at Nestmann.com.